Mortgage Insurance Lending Guidelines For Borrowers

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Mortgage Insurance Lending Guidelines For Borrowers

This BLOG On Mortgage Insurance Lending Guidelines For Borrowers Was UPDATED On October 24th, 2018

Private Mortgage insurance also known as PMI is insurance that only benefits lenders and not borrowers:

  • It is paid by the homeowner to protect the mortgage lender
  • Mortgage insurance, also referred to as MI, is required on all FHA and USDA Loans
  • It is also required on conventional loans if borrowers put less than 20% down payment and/or higher than 80% LTV
  • HUD also requires a hefty upfront MIP of 1.75% of the balance on FHA Loans
  • FHA UFMIP can be rolled into the balance of the mortgage loan
  • Borrowers then have a lifetime annual FHA MIP on all 30 year fixed rate FHA Loans
  • FHA MIP cannot be canceled unless the homeowner sells their home or refinances their current loan into a conventional loan with a loan to value of at least 80% or less

Private Mortgage Insurance On Conventional Loans

All conventional loans with loan to value greater than 80% require private mortgage insurance.

  • However, conventional loan PMI varies versus the fixed 0.85% annual FHA MIP
  • There is no UFMIP with conventional loans like the 1.75%  FHA MIP
  • Conventional lenders also offer LPMI, which stands for lender paid mortgage insurance
  • LPMI is where the homeowner is not charged PMI
  • PMI is paid by lenders in lieu of a higher mortgage rate
  • The MI is built into the mortgage rate

Purpose Of PMI

The purpose of PMI is to protect lenders in the event of borrower defaults on their mortgage and the property goes into foreclosure.

  • The insurance company will insure up to 80% loan to value
  • For example, here is a case scenario:
    • If borrower defaults on home loan
    • and has put 5% down payment
    • the insurance company will pay 15%, or up to 80% loan to value to the lender
    • Mortgage insurance does not benefit the homeowner
    • But the homeowner needs to pay the premium to protect their lender

President Obama Signs The Tax Increase Prevention Act

The United States Congress has passed the Tax Increase Prevention Act of 2014.

  • Barack Obama has endorsed and signed it
  • This is good news for current homeowners with loans that require payment of PMI
  • Homeowners who are paying any form of PMI on home loans, the chances are they should be able to deduct PMI from income taxes

Unfortunately, the 2014 Tax Increase Prevention Act of 2014 is only for the tax year 2014. This act does not extend to 2015 and thereafter.  Starting 2015, homeowners will not be able to deduct their mortgage insurance on their income tax returns unless Congress and President Barack Obama extends this act.

Great Time To Refinance To Avoid Mortgage Insurance

Since homeowners will not be able to deduct their PMI or FHA MIP on their income taxes, homeowners should think about refinancing their current mortgage loans to avoid mortgage insurance.  FHA insured mortgage loan borrowers should consult with a licensed mortgage loan originator and see if they can refinance mortgage loans into a conventional loan.  Borrowers with PMI should consider refinancing their conventional loan to a lower rate conventional mortgage loan with LPMI, for a slightly higher mortgage rate and no MI.  You can write off interest on a mortgage payment but you cannot write off MI.

Related> Home mortgage interest deduction: IRS

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